DEFINITION of 'Environmental Economics '

Environmental economics is an area of economics that studies the financial impact of environmental policies. Environment economists perform studies to determine the theoretical or empirical effects of environmental policies on the economy. This field of economics helps users design appropriate environmental policies and analyze the effects and merits of existing or proposed policies.

BREAKING DOWN 'Environmental Economics '

The basic argument underpinning environmental economics is that there are environmental costs of economic growth that go unaccounted in the current market model. These negative externalities, like pollution and other kinds of environmental degradation, could then result in market failure. Environmental economists thus analyze the costs and benefits of specific economic policies, which also involves running theoretical tests or studies on possible economic consequences of environmental degradation.

Environmental Economic Strategies

Environmental economists are concerned with identifying specific problems to be rectified, but there can be many approaches to solving the same environmental problem. If a state is trying to impose a transition to clean energy, for example, they have several options. The government can impose a forcible limit on carbon emissions, or it can adopt more incentive-based solutions, like placing quantity-based taxes on carbon emissions or offering tax credits to companies that adopt renewable power sources. 

All of these strategies rely, to varying degrees, on state intervention in the market; therefore; the degree to which this is acceptable is an important political factor in determining environmental economic policy. This debate is also known as prescriptive (in which the government would manually control carbon emissions) versus market-based (where the government would set goals and place incentives but otherwise allow companies to meet those goals however they wanted.)

Environmental Economic Challenges

Environmental economics also requires a transnational approach. An environmental economist could identify aquatic depopulation, resulting from overfishing, as a negative externality to be addressed. The United States could impose regulations on its own fishing industry, but the problem wouldn't be solved without similar action from many other nations that also engage in overfishing. The global character of such environmental issues has led to the rise of non-governmental organizations (NGO's) like the International Panel on Climate Change (IPCC), which organizes annual forums for heads of state to negotiate international environmental policies. (See also: Preparing Your Portfolio for Climate Change.

In the United States, policy proposals stemming from environmental economics tend to cause contentious political debate. Leaders rarely agree about the degree of externalized environmental costs, making it difficult to craft substantive environmental policies. The Environmental Protection Agency (EPA) oversees a National Center for Environmental Economics, which emphasizes market-based solutions like cap and trade policies for carbon emissions. Their priority policy issues are encouraging biofuel use, analyzing the costs of climate change, and addressing waste and pollution problems.

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